While Cycle Theory has its share of detractors, there’s evidence aplenty that cycles exist in the market, even if some people throw their hands up in frustration at the notion of studying them. Schwager and Mogey posit two major explanations for their existence:
1) Psychological – Markets are driven in large part by fear and greed. There’s no shortage of literature on the topic describing how this leads to periods of boom and bust, expansion and recession in markets.
2) Fundamental – In addition to being driven by psychological factors, the market is, of course, also driven by the laws of supply and demand, with the market always seeking equilibrium. That quest for equilibrium, however, does not happen instantly. There’s a lag between observing a change in a given situation and reacting to it. Additionally, market reactions to changing conditions often (but not always) results in an over-reaction, which drives the market from one imbalance to an opposite imbalance, resulting in cyclical “swings” in both activity and prices.